Artel leading Central Asia's white goods revolution

Artel leading Central Asia's white goods revolution
The most sought-after appliances are those that take away some of drudgery of household chores. / Artel
By Ben Aris in Berlin March 30, 2022

The former Soviet Union is transforming from a centrally planned command economy to an open market-based system. But in practice those big words boil down to some very simple realities: normal people are able and want to buy washing machines and vacuum cleaners.

And that was not an easy thing to do until fairly recently. The Soviet system was missing some basic elements that we in the West take for granted. For example, it didn't manufacture toasters; toasted bread was simply dry-fried in a frying pan or with a fork over an open fire.

However, the most sought-after appliances are those that take away some of drudgery of household chores: when Uzbekistan’s leading white goods producer was set up it started by producing a gas cooker, shortly followed by manufacturing Samsung hoovers under licence. Since then the company’s growth has been exponential as it came to dominate its home market, then all of Central Asia, and now it is increasingly exporting all over the world.

Artel is one of the unsung success stories of Central Asia’s modernisation and is considering plans to enter the international capital markets with a long-term eye on a public offering, Bektemir Murodov, Artel’s CFO, told bne IntelliNews in the company’s first ever interview with the international press.

Origins

Like many of the successful companies emerging from the chaos of the 1990s, the holding Group that gave birth to Artel began life as a trading operation. The company imported aluminium and plastic products such as door and window frames that were in high demand as residential homes underwent a ubiquitous “remont” – refurbishment and redecoration of homes as new consumer products became available. DIY supplies were one of the first western products to appear in the markets following the fall of the Soviet Union, for a population long used to renovating and building their own homes.

Business flourished and as the company accumulated profits the obvious next move was to set up local production. The Group built its first manufacturing factory in 2006.

“The business went well and one of our strengths was a very loyal distribution network for the doors and frames we were producing, which allowed the business to grow steadily. We ploughed all the profits back into the business as investment," said Murodov.

As the business expanded by 2010, the management met to decide on what to do next. The choice was between investing into textile production or going into light manufacturing.

“There was a lot of competition in textiles but little in manufacturing. Uzbekistan has the biggest population in Central Asia and everyone wants household appliances," said Murodov.

Company executives were dispatched to Turkey, where the designs for a household cooker were acquired as the first product to be produced. Another team bought designs for air conditioners from China and the manufacturing of both was launched in 2011.

“At the same time Samsung was opening a rep office in Tashkent and approached us to make vacuum cleaners under licence. A couple of months later we added microwaves to the deal," said Murodov.

All three products were a smash hit, and started growing by 30% a year. The businesses were grouped separately into the business Artel, an abbreviation of “the art of electronics”.

“From then on every year we added a new product to the line: vacuum cleaners, cookers, TVs, fridges, etc. Fridges were one of the most complicated of the new products to develop and required a lot of our own investment , but we started to produce them in 2013. Our distributors were pushing us to expand, as they saw an opportunity in the sale of a whole range of household appliances," said Murodov.

The government was supportive of the company’s efforts, keen to localise production and develop local light industry.

Growth & financing

From the start, most of the investment came from the retained earnings of the trading business and then the sale of goods Artel was producing, but in 2017 the company began using limited borrowing to accelerate its growth. It took out loans from a series of domestic partners to expand production more quickly, but began to borrow more actively after that. Today the company debt load remains light. In 2021, the company restructured its debt with international banks for the first time.

The company is intending to step up again in its borrowing programme and intends to tap the international capital markets for longer and cheaper credit than commercial bank loans.

“We are exploring entering the capital markets in the next couple of years. We have already done most of the preparation work for a possible Eurobond and last year completed our first set of three-year IFRS accounts. We are working on other parts of our business that need strengthening to ensure that any issuance is right for our business," said Murodov.

In addition to the change-over to international accounting system, the IFRS accounts in place since 2018, it also has a Big Four audit of the books and received its first rating from Fitch last year of B vs the sovereign rating of BB-.

The company’s revenues in 2021 were around $450mn but growth was limited that year due to the crisis and pandemic effects.

“The pandemic got worse in 2021 vs 2020. It disrupted our supply chains and sent the cost of inputs up. So we saw no growth last year in the domestic market. Nevertheless, exports continued to grow by around 30Q% year on year. We should return to growth this year," said Murodov.

Export

Artel’s owners began life as traders but these days instead of importing good to Uzbekistan, Artel is actively exporting to dozens of countries in the Commonwealth of Independent States (CIS) and increasingly further afield.

“We are exporting the same goods as we sell in the local markets but we decided to export with 0% profit while we build up our market share. In Kazakhstan we already earn profits, as we have a strong presence there now, but most of the other markets are still in development," said Murodov.

“The ‘Stans are easy to penetrate but we have to go further, and then transport costs become a problem. Uzbekistan has no access to waterways and we have to send everything by trucks and train. That makes to harder to make a profit," the CFO added. 

For this year Murodov says that Artel is focusing on building up its presence in the wider CIS markets; but the export network has already been cast wide and the list of countries that are customers is growing in length. This year, for example, the company hopes to start exporting hoovers to as far afield as Tanzania and Nigeria. In 2022 Artel plans to boost exports to Kazakhstan to $50mn.

“Next year we will further build on our export to MENA countries as well and expect good growth there too," said Murodov.

Impediments to growth

Artel is still looking to grow its production base in Uzbekistan, and the economic transformation is helping.

Murodov notes that the company is still dependent on imports for many of its inputs, which could change in the near future. The production of plastic PVC, for example, has only just been launched in Uzbekistan and there is still not enough being produced to meet demand. And the story is the same with metal production – the existing output is far below demand.

“More steel is needed and is mostly imported from Russia and China. Uzbekistan has little in the way of iron ore deposits, although there is a project underway to develop what we have, but inputs remain a problem," said Murodov.

The company is also investing heavily into its R&D, as it builds on its own brand names. In 2016 a separate R&D business unit was set up to develop new products, to make innovations.

“We have begun developing our own unique products since 2016 that are totally owned by us, which has really helped export growth," said Murodov.

The government is also supporting companies by spending more on higher education to create a better qualified workforce.

“Labour is always an issue. Before the work force was about 300-400,000 people but only 50,000 were university graduates. But the state has opened several more universities, and in 2021 alone there are 130,000 new students enrolled in university. It’s continuing to grow from year to year," Murodov concluded.

 

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